A bonus is a financial compensation that is paid as an additional amount along with what is due. It is the appreciation money that is often rewarded to an exceptional employee for the extraordinary work performed.
Companies follow a bonus step for rewarding performance and increasing employee retention while some of them offer ‘added bonus’ to employees as an extra amount at festival times of the year like Christmas bonuses. All in all, a nice bonus plan is used for rewarding achievements and showing gratitude to employees for accomplishing different objectives.
What is a Bonus?
Definition: A bonus is defined as a summation of money or something equivalent that is not part of the regular payment or base pay. It is an award used by companies as an incentive that any employee may receive for his or her good performance.
Bonus points may be given to anyone who achieves significant goals. For example, a stock company might issue bonus shares for boosting the stock’s liquidity and investor engagement.
More examples of bonuses can be a sum above salary given to a football player for signing with a team or financial incentives to improve education and determine school funding to give monetary rewards to students, schools, or teachers for motivating them to try harder and perform better.
Importance of a Bonus
Anyone starting from an entry-level employee to a senior person may receive it as a reward to improve their morale, motivation, and productivity.
Bonuses are complementary payments that come along with the regular payment or salary. It is given to an employee by an employer. A bonus may be given out for various purposes.
Someone who is providing service for a company for a prolonged time may receive a bonus. Also, if someone performs extraordinarily well, they may receive a bonus amount as a reward. Apart from that, a fresher may also receive a bonus. It acts as a motivation for them to stay in the company for a longer span.
Even in regular life, different types of bonuses act as performance boosters that motivate us to even move ahead on the long and perilous voyage and become victorious. Let us now delve into different types of bonuses that are prevalent.-
Types of Bonuses
1. Discretionary bonuses
Such bonuses are distributed by business owners for rewarding top performance at their discretion. These bonuses are not part of any contract or promised to the employees.
HRs or managers get the necessary feedback to find top employees for their employee-of-the-month program to assign them bonus points and reward performance.
The number or amount of such bonuses is up to to the business owners. Holiday or year-end bonuses can be some examples of discretionary bonuses.
2. Nondiscretionary bonuses
Teams or workers might expect such bonuses in addition to their salaries because they are based on a predetermined formula and fair disclaimer added in the employee contract, offer letter, or personnel file.
These incentives are awarded the regular rate of pay, as companies offer an incentive pay plan to the employees who accomplish certain performance goals. In this, employees know the fewer tests or performance benchmarks they might surpass to get the bonus.
3. Incentive bonus points to reward performance
These are types of bonuses that include retention, referral, and signing bonuses.
A signing bonus is an amount that companies offer to the top employees. Also, it is applicable when the rival firms are in dire need of the same candidate. People often believe that there is a bigger picture that they can achieve by giving these small incentives. A signing bonus is mainly offered to the top athletes.
The referral bonus is for those who recommend any candidate for an opening position available at a said company. The candidate usually gets hired by the company. In turn, the employee receives the bonus amount. But employees must refer candidates who have proper work ethics, positive behavior, and strong skills.
Employees who stay with a company in its hard times and are loyal towards the organization receive retention bonuses from the employers. It helps employees to trust the organization, and they find security around their jobs.
4. Bonuses based on the performance
These are the bonuses or the financial incentive that employees receive on delivering extraordinary work. It is given to the employee after the project is complete or during the financial quarter of the year.
It may be offered to an individual employee, a team responsible for a particular project, or all the staff in the company. A reward bonus is usually a once in while payment. It includes cash payments, holidays, gift cards, off-times, or a nice gesture.
These bonuses often include annual bonuses, accomplishing a milestone, or rewards on the spot bonuses. The employees who require significant recognition across the company receive a spot bonus. For instance, if an employee stays in a company for a prolonged time, like ten or fifteen years, they need recognition. Thus, they are paid with bonus amounts.
Some companies offer bonuses when the business earns a profit. The amount is distributed among all the employees of the company.
5. Inflation of bonus
Sometimes bonuses are paid to an employee with low performance. On the contrary, bonuses are usually delivered to the employees who do extraordinarily well.
There are times when a hardworking employee may perform badly due to various reasons that are not under human control. This way, these employees get their motivation back and can deliver some outstanding work.
6. Bonuses in place of pay
It is a kind of payment that employees receive from their employers in which wage increase is low and the pay gap is filled with bonuses. The companies often pay their employees with a bonus amount in place of an increment.
This way, the wages can be low while the employee gets paid. The companies may keep a low fixed cost while the bonus amount may vary from person to person and time to time. It is a strategy that many companies adopt to limit their wages.
7. Bonus shares and dividends
Apart from the employees, bonuses are also given to shareholders. Many companies offer shares or dividends to their shareholders as a bonus. These are free of cost.
It is derived from the profits earned by the company. Also, a company may offer shares in place of cash dividends to the shareholders. When a company runs out of cash or falls short of cash, it provides the investors’ shares free of cost. The shareholders can sell their shares, or they can also retain the same.
8. Contracted Bonus Payments
Employees serving the senior roles have contracts with the company that let them get bonuses when a company meets specific revenue targets or profits.
In this, employers likely state that executives would get bonuses based on different criteria related to sales, meeting growth objectives, employee retention, etc.
Difference between a Bonus and a Commission
Bonuses and commissions are payments that an employee may receive during the span of their service in a company. But a bonus is based on the performance of the business. On the other hand, a commission is based on the individual performance of an employee.
Also, a bonus can sometimes fall under commission, but a commission can never be a bonus. It also depends on the term used by the company. Sometimes a company may pay its employee for outstanding performance individually. This is when he receives a commission. But a company may not use the term.
Also, sometimes a company pays their employees with ‘gains sharing.’ It is not the same as profit sharing. On the contrary, it is the amount that a company pays its employees when there is an increase in production or profit. Whereas profit-sharing refers to the additional amount that a company pays as a bonus to their employees on earning profit.